Three Cheers for the Fed

July 10, 1995

THE stock market gave a "hurrah" last week after Federal Reserve policymakers took a baby step toward an easier monetary policy. So did we.

For 17 months the Fed had resolutely stuck to a tighter money policy in an unusual effort to preempt more inflation. That battle has been won, at least for now. The more pressing concern is the slowdown in the United States economy. Many economists are saying that growth in the output of goods and services, after deducting inflation, was close to zero in the April-June quarter. The government will publish its first estimate only at the end of this month.

The big question for the Fed's Open Market Committee when it met last week was not whether there was a slowdown, but whether the economy will snap back without the help of further interest rate cuts or will sink into recession. The discussion at that session, as Fed chairman Alan Greenspan indicated in advance, was undoubtedly "most engaging."

Within hours after the FOMC announced its decision to cut short-term interest rates one quarter of a percentage point, from 6 percent to 5.75 percent, the Labor Department sent over its June job market report. It showed that employers added 215,000 jobs to their payrolls, and the unemployment rate fell slightly to 5.6 percent. Moreover, revisions of the April and May data showed the job market has not been as weak this spring as had been thought. Job increases are watched closely for signs of possible future inflation, since businesses may bid up wages.

Nonetheless, economic forecasting is such an inexact science that a less tight monetary policy remains in order. For all economists know, the economy could already be in recession. Further, with the money supply shrinking in real terms in the past year and with tough global competition holding down prices, the chances for a revival of inflation are not great. Some say the Fed should only be concerned about price levels. We would argue that it must also consider such factors as prosperity and unemployment.

A recession would add enormously to the federal deficit, wiping out Republican plans for a balanced budget in seven years. It would worsen the plight of the lower middle class, struggling to maintain their real incomes.